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Articles: Charitable rollovers: one last chance?

The new tax law passed late last year - the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 - extends a unique planning opportunity for certain retirees. Under the new law, an individual aged 70½ or older can transfer funds directly from an IRA to a qualified charitable organization without paying any tax on the distribution.   The “charitable rollover” counts as a required minimum distribuiton (RMD) for tax purposes.

Technically, the charitable rollover break expired after 2009. Now the new law reinstates the provision retroactive to January 1, 2010, and extends it through 2011.  In other words, barring further legislation, you have until the end of this year to take advantage of this provision.

Background:  Previously, you could not directly transfer funds tax-free from an IRA to a charitable organization. Instead, you were required to pay tax on the distribution, regardless of your charitable intentions.  The tax law also worked against retirees who wanted to use IRA funds for charitable donations but no longer itemized their deductions.

The Pension Protection Act of 2006 (PPA) changed the rules for individuals aged 70½ and older.  It allowed these retirees to transfer IRA funds directly to charity, up to an annual limit of $100,000.  Although no tax deduction was allowed, donors were not taxed on the distribution either. The PPA tax break was subsequently extended through
2009 and now through 2011 by the new law.

A qualified distribution is one from either a traditional or Roth IRA that would otherwise be taxable.  The distribution must be made directly from the IRA trustee to the charity.

Furthermore, the contribution must otherwise qualify as a charitable donation. If the deductible amount decreases because of a benefit received in return - for a dinner at a fundraising event, for example - or the deduction would not be allowed due to inadequate substantiation, the exclusion is not available for any part of the IRA distribution.

Under a special rule for charitable donations, the IRS treats distributions from an IRA funded at least partially with non- deductible contributions as coming first from taxable funds and then from non-taxable funds.   All of the individual’s IRAs are grouped together for this calculation.

Finally, an IRA participant is generally required to begin receiving RMDs in the year after the year in which he or she turns age 70½.   A qualified charitable distribution counts toward this requirement.

 Be aware the rules also apply to Roth IRAs.  Roth IRA distributions to individuals older than age 59½ are usually tax- free.  But a portion of a distribution may be taxable for a Roth in existence less than five years.  If you have both a traditional IRA and a Roth IRA, it generally makes sense to use the traditional IRA first for charitable distributions.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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